Era of the ‘Credo’ : Big Business Puts Ethics in Spotlight

NEW YORK —  A mysterious envelope brimming with a competitor’s plans for bidding on a multimillion-dollar jet fighter contract appeared one morning on the desk of aerospace executive Jack Smithfield. Since Smithfield’s company planned to submit a bid of its own, he faced an urgent question--should he use the information?

“If the stuff was stolen, there’s no question it should go back,” ventured Bill Vega.

“What if the competition flubbed it and left it on an airplane seat?” asked Kent Parra. “In football, you don’t give the opposing fullback a ball he’s fumbled and say, ‘Do it over--we don’t want to win that way.’ ”

Smithfield and his problem were parts of a fictional case study that Parra, Vega and 13 other mid-level executives were considering in a day-long seminar on ethics at General Dynamics’ Convair division in San Diego.

Company-Wide Program

The seminar was one of several that the No. 1 military contractor is conducting for all 103,000 of its employees. It was also a sign of the new interest on the part of U.S. companies in using formal programs to raise the ethical awareness of their employees.

Companies are conducting training sessions and business-conduct “audits,” designating special ombudsmen, installing telephone hot lines and taking other steps intended to heighten employees’ ethical sensitivities.

“Corporate ethics work is seeing something of a boom,” says Kirk O. Hanson, an ethics consultant and Stanford University lecturer. “It’s difficult to judge its staying power, but there’s more going on now than ever before.”

Of 279 large companies that answered a 1985 survey conducted by the Center for Business Ethics at Bentley College in Waltham, Mass., about 20% said that they were using seminars or workshops to reinforce good ethics. Most of those began their programs in the last four years, the center’s director, W. Michael Hoffman, said.

About 8% of the same firms said that they had ombudsmen to hear questions and complaints about ethical issues, and 18% said that they maintained committees to consider policy-making on ethical questions.

These employers’ activities are just some of the indications of a growing interest in business ethics. There are now more than 30 centers of research studying business ethics, compared to the handful that existed a decade ago.

College courses in business ethics have proliferated on American campuses; there are 25 college textbooks on the subject, and half a dozen new ones appear each year. Ethics consultants now criss-cross the country advising corporations on how to approach ethical consciousness-raising.

The most visible of the ethics programs have been inaugurated by companies struggling to restore damaged reputations that threaten their businesses.

General Dynamics, reeling from two years of allegations about improper contracting practices, opened its ethics program so that it could remain eligible for Navy contracts. E. F. Hutton is forging an ethics program following last year’s conviction on a massive check-kiting scheme.

These “street conversions” are not the only way companies are becoming involved in such programs, however. Efforts have been launched by top executives with a variety of motives at companies such as McDonnell Douglas, American Can, Standard Oil and Chemical Bank.

They see these efforts as useful not only for preventing misconduct that could cause public-relations and legal problems, but also for lifting morale and productivity, and ensuring that managers are alerted to new hazards as they enter competitive, deregulated businesses. Some executives simply want their organizations to behave honestly for honesty’s sake.

White-Collar Prosecutions

Experts cite a number of reasons for the increased interest in business ethics. Concern about improper business practices grew after the overseas bribery scandals of the mid-1970s, and this concern has since been heightened by increased press attention to business and white-collar crimes.

The Reagan Administration, in the Pentagon and elsewhere, has also urged businesses to pursue self-policing ethics programs. Managers at companies such as Borg-Warner and McDonnell Douglas see ethics programs as a way to inculcate the sort of group values--apparent in Japanese companies--that seem to minimize friction and improve productivity.

They believe that by identifying common values and goals, they can make employees feel more involved with the company and work harder, says Gary Edwards, executive director of the Ethics Resource Center, a business-supported research center in Washington. About two-thirds of the nation’s economic output now comes from service industries, he says, “so if we want to increase productivity, one important way is to change the attitudes of people who deliver those services.”

Still, free-market critics say that ethics is a matter properly left to the individual. Others see the trend as a big-business tactic aimed at defusing pressure for new regulation. Indeed, the Ethics Resource Center was set up expressly to quiet the outcry for further regulation of business.

‘Commotion,’ Not Action

Other critics say that such programs are unnecessary, even a distraction. A company sets an ethical tone by the way its top management distributes rewards and penalties, “and not by what they say,” said Andrew S. Grove, chief executive of Intel, the Santa Clara-based microchip-maker. “The programs are a response to a need to do something, but they are commotion rather than action.”

Some ethics efforts are criticized as being no more than public-relations gestures. A manager at one of the Beatrice Companies’ far-flung divisions recalled the day last year when the company’s Chicago headquarters sent--with no advance warning--a cardboard box containing a framed copy of the Beatrice ethics credo and baseball caps with the company name emblazoned on the front.

The credo struck him as “a lot of innocuous sales bull,” he said. “I threw mine away the other day.”

Marilyn C. Mathews, political science professor at Washington State University, conducted an analysis and found that companies with codes were just as likely to run afoul of the law as those with none. Results of her research also suggested that the adoption of a code would not reduce the incidence of criminal charges against a company, Mathews said. “It just didn’t make a difference.”

Workshops Air Problems

Yet proponents say that well-designed ethics programs can help. Seminars and workshops seek to show employees the many ethical aspects of their business decisions, and suggest ways to resolve the competing claims that come to bear on managers.

Such discussions by themselves further the cause of better ethics, advocates say, because they signal middle-level managers that senior executives want them to consider such issues in their everyday decisions. “A lot of managers don’t raise these issues, simply for fear the boss will say, ‘Look who’s Mr. Goody Twoshoes today,’ ” said ethics consultant Hanson.

Chemical Bank offers in its workshops case studies that demonstrate the ethical pressures on bankers that are likely to increase in the more competitive, deregulated financial services market.

In one such fictional case, for example, a young loan officer is asked to judge a request for a loan from a high-tech firm. The company has enjoyed explosive growth, but the loan officer discovers that a Japanese company plans to bring out a competing and better product.

When he recommends against making the new loan, however, his boss chews him out for threatening the bank’s relationship with a good customer and tells him to reconsider his recommendation.

Employee in a Bind

The loan officer must weigh his obligation to his boss, who is under pressure to increase profits, to the bank and to the customer--as well as his own chances for career advancement.

“This is no Sunday school class, but an effort to help people recognize ethical dilemmas and give them courage to make the right decision,” says Robert Rosenbloom, who helps run the seminars for the bank. “Companies have to rely on judgment, because they can’t make rules and regulations to apply to every situation.”

Some programs also instruct managers in how they can reinforce ethical values in their organizations.

At the General Dynamics and McDonnell Douglas workshops, managers are told that they can apply such influence in the way they mete out rewards and penalties, in the personal examples they set, and by establishing “rituals” that support the firm’s values.

The dispensing of promotions and raises is the key to credibility, the specialists say. Bosses who want to be seen as serious about ethics should evaluate employees not only on how they contribute to sales and production goals, but also on harder-to-judge factors such as honesty and fairness and respect shown for their peers.

Example Is Stressed

Employees won’t believe a boss is serious about ethics “if he writes and talks about ethical values but then promotes the guy who thinks ethics are crap and says so,” said consultant Hanson, who designed the General Dynamics and McDonnell Douglas seminars.

IBM, which has long tried to work ethical concerns into day-to-day business practices, asks its employees to evaluate each year how well their bosses meet the company’s conduct code. The bosses are shown the results, compiled in aggregate form, and then meet with the employees on how they will respond to the critique.

Personal example is crucial as well, because employees look to the boss’s actions to learn what is suitable behavior.

When wage and price controls were imposed during the Nixon Administration, some managers at Weyerhaeuser discovered that competitors were using a loophole in the law to raise prices, recalled James O’Toole, a USC management professor. But George Weyerhaeuser, chief executive of the forest-products company, vetoed a suggestion that his company do the same. He said that Weyerhaeuser should follow the rules regardless of whether it agreed with them, and of competitors’ actions.

Legends in Making

Such deeds are often long remembered by employees, and become corporate lore.

Another means of reinforcing ethics is for managers to “ritualize” ethics discussion by taking up such questions at a regular point in staff meetings, for example, Hanson says.

Many corporations have also written codes of corporate conduct and distributed “credos” spelling out their business values.

The first flurry of code-writing occurred followed the overseas bribery scandals of the late 1970s. The codes of that time, often written by the corporations’ legal departments, typically prescribed behavior in a specific way, with the aim of keeping employees on the right side of the law.

For example, IBM’s corporate-conduct code during this period prohibited salesmen from making “grimaces” when discussing competitors’ products, lest their facial expressions be considered disparagement. IBM was sensitive to this because it was facing an antitrust suit in which the Justice Department contended that the computer maker was crushing its smaller competitors.

Corporate codes of more recent vintage still cover legal points, but increasingly, they tend to set forth broad principles. And companies are trying more and more to make such code-writing more meaningful to employees, by enlisting them in the drafting process and making a show of the chief executive’s involvement in the project.

A code ought to be specific enough “that it gives us the spirit in which we’re supposed to do things, yet loose enough to allow for freedom of judgment,” says Kenneth E. Goodpaster, a professor at Harvard Business School.

Borg-Warner, a diversified company based in Chicago, spent about a year floating ideas among about 100 of its managers to develop a credo called “The Beliefs of Borg Warner.” The one-page statement was recently issued in booklet form. It enumerates and explains the company’s five key beliefs, which include “dignity of the individual,” “responsibility to the common good,” and the “commonwealth of Borg-Warner and its people.”

‘Safety Valve’ Suggested

Some company officials and ethics specialists believe ethics codes need to be strengthened by adding a special appeals process--a “safety valve”--that employees can use without risk to themselves to raise ethical questions or blow the whistle on violators.

As part of its ambitious program, General Dynamics maintains a network of telephone hot lines and ethics ombudsmen. McDonnell Douglas has such a program as well, and General Electric added an ombudsman last year, after it was convicted of fraudulent overcharging on government contract work on the Minuteman missile.

General Dynamics found that two-thirds of the 200-odd calls it received in the first three months of the program were from employees asking what was expected of them.

Companies that use such hot lines must treat complaints about employees “as nothing more than tips,” says ethics consultant Hanson. “The danger is they’ll be used unjustly to get the caller’s fellow employees or boss in trouble.”

Some companies, nonetheless, feel that systems of phone tips and ombudsmen detract from the effectiveness of the regular chain of command. “There’s a suggestion that the regular organization is less ethical,” said William T. Chamberlain, a senior vice president of Atlantic Richfield.

The Los Angeles oil company instead permits its employees to go directly to their boss’s boss--or higher--if need be--to resolve ethical questions, Chamberlain said.

Directors on Committee

General Dynamics also has an ethics review committee of its board of directors charged with setting policy on ethical questions that arise.

Dow Corning, the Midland, Mich. silicone-products manufacturer, uses business-conduct “audits” to maintain an awareness of ethics at its decentralized organization.

About 20 times a year, a four-person committee meets with Dow Corning managers in the field to discuss the company’s ethics code and check on compliance. Company officials say that the practice has helped to clarify sticky questions that come up in their international business, which accounts for half of Dow Corning sales.

After lengthy discussion, the company has also modified some of the provisions of its code to recognize, officials say, that American businesses cannot always live by U.S. ethical standards that do not prevail overseas.

The code originally prohibited any sort of personal payment to government or company officials. In the modified code, Dow Corning managers are prohibited from making payments that, in effect, buy contracts (which is also illegal). They may, however, in some cases, make legally permitted “facilitating” payments to speed work that is already under way.

Some Payments Permitted

For example, the code permits a manager to make a payment to expedite delivery of products that might otherwise sit for weeks on a dock.

“Before, we said ‘no pay, period.’ We tried to be lily white,” said John E. Swanson, chairman of the company’s business conduct committee. “Now, we’re trying to take a slightly more realistic attitude.”

Judging the effectiveness of corporate ethics efforts is tricky. Such programs will certainly not, for example, inoculate companies against scandal.

General Electric, which has long campaigned to cultivate good ethics, has had three major criminal convictions in the past 25 years: price-fixing in 1960, an overseas bribery case in 1981 and defense procurement fraud last year.

“If someone’s dead set on committing a fraud, our program won’t help him,” said Kent Dryvestyn, who heads the General Dynamics ethics program.

Hanson acknowledged that companies are not likely to see any measurable increase in productivity, “and you can’t exactly document missed indictments.” He says the effects of such programs will show up in better decision-making on ethical questions, and that a company should know its program is working simply by the fact that ethics are being discussed.

“If people are raising these questions, if your hot line is flooded with calls, you know the subject has been legitimized,” Hanson said.